If you have saved up for years until this very moment. The moment you start your first business. Then go you.
That’s quite an achievement because the reality is that most businesses will need funding from somewhere else at one time or another. That’s why the government has a scheme in place to boost small business lending.
The most common type of business finance is a loan. However, there is a lot more to it than completing a couple of forms and waiting for the cash to roll in.
Here are 10 questions you should ask yourself before you take out a loan.
1. What type of loan is best for me?
When you think of a loan, the first lender to spring to mind is the bank. However, it’s not the only option you have. What about peer-to-peer lenders like Zopa and Ratesetter, or flexible business capital providers like Everline?. Before plumping for the most obvious choice, take a step back and think which type best suits your needs – make use of the free resources these sites have i.e. Everline’s business loans page provides a lot of free information, it’s designed to encourage you to use their service of course, but the you’re under no obligation just from reading their guides!
2. Will I quality for a loan?
It’s all well and good applying for a loan, but an application does not guarantee you will be approved. Just like when you want to borrow for personal use, the lender can always reject your application. To reduce the risk of being turned away, have a look at the requirements. Perhaps there is a minimum annual turnover, amount of time you’ve been trading, and so on.
3. What is my business credit score?
One of the things that any lender will look at before approving a loan is your credit score. You’re probably aware of this as a personal borrower, but what about as a business? It’s not just you that has a credit score, your business does too. A low credit score isn’t going to get you very far. And even if you are approved, you’ll end up paying higher interest rates.
4. How much do I really need?
Well, of course, £100,000 would be lovely. That would allow you to achieve all your business aims and objectives. But do you really need that much money? Don’t forget you have to pay this money back, so unless you’ve worked out how much you need to borrow, try to avoid it. The same goes for underestimating. It doesn’t look very good if you have to go back and ask for more.
5. What will I use the money for?
How did you come to decide you needed to raise more money? Before filling in any loan application, you should know exactly how it will be spent. Perhaps you’re looking to expand, buy new equipment, or take on staff. Don’t ever borrow money without a clear plan for how it will be spent.
6. How will it help my business?
Another point to consider is that whatever you’re buying with the money you’re borrowing, it should help your business. You might think you need to hire another member of staff, but once you’ve spent the money on recruitment, you have to pay another wage. In the long run, perhaps it would have been better to do the work yourself?
7. Will I be able to repay the loan?
Ah, now this is absolutely critical. If you’re borrowing money to dig yourself out of a hole, make sure you are able to pay it back. While your financial projections aren’t set in stone, they should give you a clear idea of whether you can clear the debt.
8. How would I cope without the cash?
This is another chance for you to think about whether you really need this loan. What will happen if you can’t get your hands on the cash? Will you find another way to manage, can you cut expenses, or will it mark the end of the business? Raising money should not just be a way to avoid doing all the legwork that comes with running a successful business.
9. Is there an early repayment penalty?
If you opt to take out the loan, but then a few months in, you realise your business has done far better than you thought, and can pay it back earlier. You might think this is great, a weight off your shoulders, but some lenders will actually charge a fee for paying it back early. Ideally, this is something you want to avoid.
10. What if I can’t pay it back?
Will you be charged a fee for missing a payment? You need to know this before putting in an application. Taking out a loan you can pay back will damage both your personal and business credit score, making it harder to get credit in the future. Depending on the type of loan, it could also lead to the loss of assets, including your home.